Flashcards in 7. The Price System: Signals, Speculation, and Prediction Deck (12):
What do markets link? And to what do they link?
Markets link the world (combining self interest + social interest).
Markets link to one another. (Lowered costs in one market affects another)
Give an example of Market Links regarding Brazil.
Brazil produces oil and candy.
If oil price increases, there is a shift from sugar production to ethanol production.
This holds down fuel costs but increases sugar price.
What is the great economic problem?
Arranging limited resources to satisfy all wants.
What is a price?
A signal wrapped up in an incentive.
What does the price system solve?
The information problem.
What is speculation? What is a strong incentive of speculators?
Attempt to profit from future price changes. Preparation for disruption smooths prices.
Speculators have strong incentive to be accurate to avoid money loss.
Contracts to buy/sell specific quantities of a commodity or financial instrument at specific prices with specific delivery times (in future).
Do sellers and buyers of futures agree or disagree about the future?
Disagree because seller and buyer think they can profit from the other.
What are future markets used for? Give an example for airline companies.
Speculation and reducing risk.
Airlines knowing fuel costs in advance can buy oil futures.
What does signal watching entail?
If future price is higher a supply disruption will occur.
Future prices are informative about future events.
What are prediction markets? Give an example.
Speculative markets where prices are interpreted as probabilities and used to make predictions.
IOWA markets about political candidates.